As an entrepreneur, we know that your business is your baby. Not unlike actual parenting, it takes a lot of time, energy (hello, fifth cup of coffee before noon), and nurturing to ensure your baby is at its healthiest. The financial health of your small business should always be a priority to support continued success. This is where calculating cash flow comes in. 

What Is Cash Flow?

Put simply, cash flow is a record of the money flowing into and out of your business. Cash comes in through customers or clients buying your services. Cash flows out through your expenses—think, rent for office space, payments on business loans or credit cards, or outstanding invoices.

This information is something your accountant or bookkeeper keeps track of. They can help you collect and organize all of the numbers needed to calculate your cash flow. This is a procedure you’ll want to practice bi-annually or even quarterly, so integrating your accounting and bookkeeping into your financial process will streamline your information and make it easier to locate for your next cash flow calculations. 

How to Calculate Cash Flow

Typically, there are four different ways to calculate cash flow, each having its own purpose and formula. Calculating cash flow using a cash flow statement is the most common method for figuring insights into your business’s finances. However, we’ll tackle the following as well: cash flow forecast, operating cash flow, and discounted cash flow. 

How to Calculate Cash Flow Using a Cash Flow Statement

The cash flow statement (or statement of cash flows) shows a detailed breakdown of how your cash flows into and out of your small business. It uses information from your profit-and-loss statement and your balance sheet. This statement covers a specific span of time (this is where the quarterly or bi-annually cash flow calculations come in) and covers the following: 

  • Cash from operating activities
  • Cash from investing activities
  • Cash from financing activities
  • Disclosure of non-cash activities (not always included) 

Cash flow is calculated by taking the figures associated with each of the above activities and adding or subtracting them from your net income. Follow this formula to calculate your small business’s cash flow: Net Income +/-  Operating Activities +/- Investing Activities +/- Financing Activities + Beginning Cash Balance = Ending Cash Balance. 

How to Calculate Your Net Cash Flow 

Begin with your net income, which can be found at the bottom of your income statement. From here, factor in non-cash expenses. Any losses that occurred between now and the previous cash flow period need to be added back to the net income. Any gains that occurred should be deducted from the net income. Non-cash expenses that you’ll factor in will include: 

  • Depreciation Expenses: How much a particular asset costs over a fixed period of time, particularly tangible assets purchased to support production. For example, if you purchased new equipment for $250,000, you would say that the depreciation is $50,000 each year for 5 years. 
  • Amortization Expenses: Similar to a depreciation expense, this is another asset, but intangible, like patents, franchise agreements, or organizational costs. The value of these assets are spread out over its useful life. Meaning, you wouldn’t be able to salvage any value once a patent or franchise lease is up. You could, however, sell a building or a piece of equipment.
  • Depletion Expenses: This refers to any payments made for the use of natural resources. The figure represents the number of units of a given resource consumed, multiplied by the cost per unit. 
  • Gains or Losses from Sale of Assets: This is the difference between the amount paid for an asset and the actual value of the asset at the time of purchase. 
  • Losses from Accounts Receivable: Loss of income from outstanding invoices. Meaning, money that your customers owe you for providing a service or product. 

When calculating your net cash flow, the total amount for losses must be added back into the net income and the total amount for expenses must be subtracted. 

How to Calculate in Operating Cash Flow

Then, tackle operating cash flow, which refers to any cash your business uses to operate. Payments made to vendors or employee salaries. Although operating cash flow alone is just one piece of the puzzle, it’s important to make sure each piece is calculated correctly. This ensures that your ending calculations are accurate.  

These four categories will include: 

  • Accounts Receivable: Any outstanding invoices that you expect to see payment for
  • Inventory: Total costs associated with supplies needed to execute your service or provide your product
  • Prepaid Expenses: Assets that you’ve paid for but have not yet used
  • Receivables from Employees and Owners: This includes payroll expenses 

Now, do you subtract or add when testing the math? If the total number for a given asset is greater than what it was during the last cash flow period, then this indicates an increase. This means that cash was used to support this increase and therefore caused a decrease in the business’s cash. So you would subtract. However, if the number for a given asset is less than what it was in the previous period, then less money was invested in this asset, leaving more money in the business. In this case, add. 

How to Calculate Investing Activities

Next, factor in investing activities. This may include, money used to purchase new equipment or renovate your office –– to accommodate more workers so you can operate more efficiently. Similar to operating activities, if you invested in more equipment, for example, you would subtract that sum. If you sell equipment, you would add that sum back in.

How to Calculate Financing Activities

Financing activities refer to money that is owed, such as short- and long-term business loans. In order to calculate the total sum from investing activities, which you’ll factor into your cash flow calculations, start with loans or equity. Add together any loans or equity that you’ve received. Next, add any loan repayments you made, stock purchases, or dividend payments given to shareholders. Finally, take this sum and subtract it from your total loans or equity. The difference is the total investing activities. 

How to Calculate Cash Flow Using a Cash Flow Forecast 

Small business owners may opt to calculate cash flow using a forecast. This will help you predict what your cash balance will be in the future. You should still regularly calculate your cash flow using a cash flow statement, as this will help you keep a pulse on your current finances. However, the forecast method can help you make educated, financial decisions. Decisions pertaining to future business budgeting strategies, investments, or crafting business plans to request funding.

In order to calculate your cash flow for the future, use the following formula: Beginning Cash + Projected Inflows – Projected Outflows = Ending Cash

Start with your current balance. Add in the amount you expect to earn during the set period you’re forecasting. This cash could come from customers buying your product or service, loans from successful funding requests, or prospective investors. Then, deduct cash outflow. To get this number, add up the total amount of cash you expect to owe, from sources like rent, payroll, loan payments, or vendors. This will give you your forecasted cash flow. 

Use these formulas to help accurately calculate the movement of your small business’s money. This will create financial transparency for you and your team. It will allow you to closely monitor your revenue and expenditures, as well as proactively combat financial obstacles.

Free insights to help you take control of business finances.
Discover the best tips, tricks, and tools for better money management.